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In conversation with MR. ARJUN MEHTA, Associate Director - Business Development, Solar Town

WHAT ARE THE RISKS TO THE NEXT STAGE OF DEVELOPMENT OF DISTRIBUTED SOLAR PV IN INDIA?

In the current environment of extremely fragmented development of distributed solar PV generating assets in India, structuring an optimal and balanced portfolio is absolutely critical in unlocking long-term value for a project developer or investor alike. But what makes it structured? How would a portfolio investor manage the asset book? What are the risks, especially in the popular Power Purchase Agreement model, and might they be mitigated?

The first is understanding where the risks are embedded. In a price sensitive market such as India, long-term PPAs are often won on pricing, even if L1 is cheaper than L2 by a fraction. However, the very nature of long-term contracts require a deeper focus on quality of execution which falls upon the EPC contractor, O&M provider and asset manager where the theoretical life of a solar PV asset, say 25 years, needs to be fulfilled. Stiff pricing negotiation for short-term gain does not always help in maintaining asset quality where allied components of the project delivery value chain including construction risks, defects liability, plant insurance, effective contracts administration and maintenance shortfalls.

Due to the nature of solar power being an intermittent source of electricity, it cannot yet be a power source for baseload consumption, for instance for a factory with inductive load. Therefore, the dependence on the grid or the dirtier cousin, diesel, poses a commercial risk in case the grid tariffs fall during the course of the PPA tenure or ownership of the solar plant. This tenure risk is an increasingly viable event especially if we were to succeed in (or come close to) our renewable targets where there would be a dumping of lower-LCOE denominated renewable energies in to the grid.

Rapid technological advancement in terms of solar panels with higher efficiency and lower degradation, commercially available monocrystalline panels, inverters and BOS supporting lower energy losses, and energy storage will also pose the risk of redundancy during the lifetime of the today’s plant.

Numerous asset owners face credit from the customer, even better branded conglomerates, owing to tariff renegotiations, weak PPA contracts, over valued transactions and absence of enforceable payment collateral. A strict customer and project appraisal as well as portfolio diversity to ensure the capital is spread over several assets in different discoms and with customers of different credit profiles is a way of mitigating this risk.

Finally, policy complexity in our Centre-State driven market poses a critical challenge to the next stage of project development unclear cross subsidy surcharge regimes, uneasy inter-state export of electricity and often long timelines to obtain NOCs form the CEIG/Escom stem the growth of distributed solar PV. Further, without net metering in certain states, understanding baseload consumption patterns of the customer poses a consumption risk, as excess generation cannot be fed back in to the grid.

AS THE ASSETS BECOME OLDER, WILL AGGRESSIVE BIDDING TODAY BECOME A PAIN POINT FOR THE INDUSTRY A FEW YEARS DOWN THE LINE?

Reverse tendering leads to a race to the bottom, which leads to the quality and project delivery risks as discussed earlier. As today’s asset become older, today’s tariff structures in long-term PPAs will face redundancy risks unless there is a price floor or a quality driven tender process where project spec and technical norms drive participants.

Aggressive bidding also requires aggressive capital, which is contrary to the need for infrastructure financing that relies heavily on patient capital. Since many of the asset investors have built their portfolios with the intention of consolidating an asset book to be sold off to a larger aggregator.

WHAT SHOULD A LARGE PAN-INDIA PROJECT DEVELOPERS DO IN THE CURRENT ENVIRONMENT?

Larger, better funded developers must leverage their country-wide footprint and access to capital must innovate on portfolio structuring, especially from a financial engineering point of view. The issuance of green bonds, securing capital from sustainability-driven funds, raising patient capital from pension funds and DFIs as well as finding a way to price the risk premium lower are some of the ideas larger developers can work on.

With the focus from larger developers largely being restricted to customers with a stronger credit profile, the untapped customer segment are those in cyclical industries, with lower credit ratings and entities with newer balance sheets where we will most certainly see the next stage of penetration of solar PV in the Opex service model. Access to the right kind of project debt, innovative financing models, stronger contracts, shorter tenure contracts might emerge as suitable models to tap in to these segments, supported by the larger developers’ muscle.

Larger, most established brands must mobilise resources in to promoting dialogues with government on significant policy moves that enable a framework for long-term stability of the sector. These might include promoting a nationwide standardisation of net metering, trading networks for RECs, stronger enforced RPO, recycling of used solar hardware etc.

Finally, mega IPPs must view market consolidation with the right intention to support smaller, regional players and building their asset books in a cohesive environment, rather than with the intention of wiping the smaller developers out.

WHAT SHOULD A SMALLER PROJECT DEVELOPER DO?

India’s distributed solar PV will remain to be a fragmented market, where smaller regional players will certainly continue playing a role.

Access to the local markets supported upstream by the aggregation by larger players will enable smaller developers to provide regional channels for portfolio owners.

Innovative financing models can be grown quicker by entrepreneurial outfits. These can include finance lease, operating lease, construction finance for smaller EPC providers, unsecured project lending to smaller asset book developers – business models which can be cultivated and executed quicker by smaller developers than their larger counterparts.

Smaller developers can also look at diversifying in to allied service streams including asset monitoring and data analytics, asset management beyond O&M, energy consumption auditing etc. as well as cross sectoral opportunities for instance with electric vehicles, hybrid fuels, biogas, solar thermal etc.